How do different entities determine your current tax rate for correct withholding? Say your interest payments from the bank — does the bank consult the tax authority to determine the correct rate? Similarly, how does it work if you have two employers?
Second, in a graduated income tax system, this would result in decreasing take-home pay over the course of the year. Does that not cause some confusion/strife? Seems like plenty of people struggle to budget beyond paycheck-to-paycheck as it is (in the US).
EU country: My employer reports my salary and already paid my taxes for me, deducted from my pay check.
All banks report what I paid in interests on my loans and how much interest I got paid on my savings accounts. They also report what profits I made from funds and whether I sold any at a profit (in which case they deducted and paid the tax on those profits).
The rates are fixed for most kinds of income that entities other than employers are concerned with. So a bank can deduct the dividends tax easily. Tax brackets for salary taxes exist, but so long as you have one employer only, and don't suddenly get a massive pay hike/cut, they will know your yearly income and can deduct given the correct bracket. There is no decrease in take-home pay and no confusion (I honestly didn't quite understand where the confusion would arise?)
If too much or too little has been paid for the whole year, that's simply mentioned at the bottom line of your prefilled online tax return form.
> Tax brackets for salary taxes exist, but so long as you have one employer only, and don't suddenly get a massive pay hike/cut, they will know your yearly income and can deduct given the correct bracket. There is no decrease in take-home pay and no confusion (I honestly didn't quite understand where the confusion would arise?)
That's pretty much identical to US withholding. As long as your employer can easily predict your annual wage income, that part is withheld basically correctly. If you change jobs or experience an unusual bonus or hold multiple jobs, good luck.
> If too much or too little has been paid for the whole year, that's simply mentioned at the bottom line of your prefilled online tax return form.
Yeah, that's similar to the US, except the prefilled form isn't always online and is called a W-2. It is copied into the actual filed 1040 document and withholding is credited against your taxes owed.
The grandparent post claimed: "One of the other complications with US taxes is that payroll systems and the exemption formula make it hard to get your deductions exactly right (this happens in Canada too), because you have to be able to exactly predict your annual income. In the UK the “Pay As You Earn” system deducts exactly what’s needed as you earn it." (My emphasis added.)
That comment (and the name) suggests that — unlike the US — the UK withholds at the rate of your exact current tax bracket. If that's true (perhaps I am misreading it), your take-home pay would decrease as your tax rate increases over the year, assuming your gross pay is split evenly across pay statements.
That does seem confusing (unless the gp was formulated incorrectly). Most tax systems have some progressivity such as a large base deduction which could effectively make your first salary tax free and quite possibly make the last one of the year be taxed at over 50%. It would be confusing to say the least. I'm guessing the GP was just poorly formulated and that doesn't happen and "exactly what's needed as you earn it" is still involving at least a multiplication with 12 as the prediction for yearly income from monthly salary.
Second, in a graduated income tax system, this would result in decreasing take-home pay over the course of the year. Does that not cause some confusion/strife? Seems like plenty of people struggle to budget beyond paycheck-to-paycheck as it is (in the US).